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February 17, 2012

On February 9, 2012, the FDIC sued four former officers of Silver State Bank (Henderson, NV). Silver State operated 12 branch offices in and around Las Vegas and 4 branch offices in metro Phoenix. In addition, it had 12 loan production offices in several western states and in Florida. Silver State was closed and placed into FDIC receivership in September 2008. For a copy of the FDIC’s complaint, click here.

The defendants in this action are Silver State’s former CEO, the former EVP of Real Estate Lending and two former loan officers. According to the FDIC’s complaint, in early 2006, the CEO steered the bank on an aggressive growth strategy focused on high risk Acquisition, Development and Construction (”ADC”) loans. The CEO and the EVP of Real Estate Lending aggressively pursued lending opportunities in the Bank’s two principal markets – Las Vegas and Phoenix – despite numerous indications that those markets were in steep decline. The FDIC liberally cited several articles published by the EVP that predicted that the real estate market would suffer a painful crash. Despite his own predictions, and his own acknowledgements once the market started to seriously decline, the EVP allegedly sugar-coated his reports on market conditions to the Bank’s board, and he continued to recommend speculative ADC loans to the Senior Loan Committee. The FDIC in part attributed the defendants’ “reckless” behavior to the Bank’s compensation structure, which richly incentivized loan officers to make loans without regard to quality or risk.

The FDIC seeks to recover damages in excess of $86 million for 14 specific bad credits. The loss loans at issue all had one or more of the following types of deficiencies: (i) insufficient analysis of the viability of the proposed project; (ii) a failure to determine the borrower’s ability to repay; (iii) insufficient collateral for a loan that exceeds the permitted LTV ratio; (iv) a purely speculative loan in violation of the Bank’s loan policy; (v) an excessive interest reserve; and (vi) a misadministration of the credit in violation of the loan policy, including improper and unauthorized disbursements.

There are a few interesting notes about the FDIC’s suit relating to Silver State. First, it is interesting that the suit was only brought against officers, and no directors were named under any theory. Second, it is notable that the FDIC brought no ordinary negligence claims, only gross negligence claims, apparently conceding that the FIRREA standard applies. Finally, it is notable that the suit was filed over three years from the date of receivership, which would subject it to a statute of limitations defense, unless some kind of tolling agreement had preserved the claims.